Whoa! How can we extract a positive message from the phrase ‘Death and Taxes,’ often cited as the two things that are inevitable in life? Both are (unfortunately) grossly negative! I believe the right empowered money strategy can flip them to the positive side by maximizing “life” and building a lasting legacy that will outlive each of us. So, let’s dive into Part 1 of this two-part discussion and squeeze something positive out of the old familiar phrase.
Part 1
The deadline for filing our 2022 taxes in the U.S. is approaching. At this juncture we have very few options for impacting the past year. However, now is a perfect time to upgrade our knowledge and position ourselves better for future years. Eventually everyone needs a good tax accountant (or in some cases a tax attorney) because navigating the 6,871-page tax code is a daunting task. But a personal tax strategy begins with understanding and preparation prior to engaging with a tax professional. A quick tax literacy assessment includes two key elements:
- A cursory knowledge of how the tax code works, who it impacts and how we can use it to our best advantage.
- Knowing why the wealthy don’t pay taxes – LEGALLY! Understanding the distinction between tax avoidance and tax evasion. Evasion is failure to file a tax return or deliberate underpayment of taxes. Evasion is illegal and punishable by imprisonment – period. On the other hand, tax avoidance is a strategy to reduce personal tax liability and maximize after-tax income. Just ask Donald Trump or Warren Buffet for more details. Or you can do what I do—check out Robert Kiyosaki on YouTube for specific, understandable strategies.
Four Quadrants
Kiyosaki describes four classes (quadrants) of taxpayers. (Note, these are not necessarily related to federal income tax brackets. Instead, these categories lump all taxes together – income taxes, sales taxes, property taxes, etc.—to give us an understanding of how all these impact our money strategies.) So, let’s define these four categories and re-think our personal tax positions.
Employee
The “E” (Employee) is first quadrant. These are people who have a job, workers receiving a paycheck from an employer. On average the employee pays 40% of gross income in the various categories of taxes – some will pay much more and others somewhat less. Many struggle to live on the remaining 60% and will look to increase income by obtaining a higher paying job, working longer hours or acquiring parttime jobs, solutions that result in high stress to the worker and low quality of life. And, of course, increase in income means an increase in taxes! So, people in this quadrant are prone to seek relief by moving into the next quadrant.
Self-Employed
The “S” (Self-Employed) is the second quadrant. Business ownership offers the hope of greater control of the company’s operations and a larger share of company profits, compared with working for someone else. But a hidden tax problem is attached to small business ownership. This quadrant, on average, pays 60% in taxes – higher than any other. A business owner is responsible for income taxes for herself as well as all employees. And issues relating to other taxes (particularly state sales taxes) are often rather complicated.
Those in the “S” quadrant are said to “own a job” because they are still trading personal time for money. Frequently the self-employed becomes the “chief cook and bottle washer” for the organization and being responsible for all operations can completely destroy time freedom and quality of life. Statistics show that about 70% of small businesses crash and burn within the first 10 years! So let’s keep looking for better options.
Business
The “B” (“Business”) is the third quadrant option and describes the big business owner. The average tax burden of these businesses is a very desirable 20%. Those in the “B” quadrant don’t own a job, instead they own a system of business that allows them to leverage the time, talent and resources of others to earn income. Most begin as small, unknown businesses that seem to suddenly explode on the scene and become the proverbial household names – like Amazon, for example. Nearly all big business owners are risk takers, innovators, early adopters of new technology. The big dreams and tenacity of these entrepreneurs are rewarded with wealth, status and fame.
Because they bring incredible benefits and solutions to society the tax laws favor them with many advantages. Those who build cities, industrial plants, etc. will hire thousands of people, generate profits for suppliers and stimulate local and global economies. Income taxes are paid by the hired workers. When business owners need more money, they create a new product or acquire a new system and so benefit society and as they produce money. For this reason, taxing the wealthy is difficulty because they don’t have jobs.
Investment
The “I” (“Investment”) is the final quadrant. Those in this quadrant can legally pay as little as 0% taxes. In general, investors have the highest financial education and are adept at finding assets that provide steady income – both active and passive residual income—using other people’s money. Income from acquired assets are used to acquire more assets, creating a steady flow of cash. When investors need more money, they look for opportunities to acquire more assets that will work for them.
Now What?
All this sounds good, but here’s big question: How does the average person use this information to her best advantage? The answer lies in doing a little investigation (research) and getting into a financial literacy community where people are actively deploying beneficial tax strategies. We must become knowledgeable, rigorously engage in our financial planning, not relying solely on tax professions to steer us in the best direction.
So, while death and taxes are inevitable, we have ways of maximizing life and minimizing taxes through financial literacy. Stay tuned for Part II of this article, where I will take a deeper dive into one tax move that helps us capitalize on the very best that all four quadrants have to offer.
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